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February 4, 2015

Dangerous play by Erdoğan

Vahap Uysal*

At 9 p.m. on Tuesday, Feb. 3, police raided the headquarters of Bank Asya in İstanbul, Turkey, to help the takeover of the bank by the Savings Deposit Insurance Fund (TMSF). Bank Asya is an Islamic bank largely run by businessmen associated with Mr. Fethullah Gülen, an influential Islamic scholar with a large following in Turkey.
The raid was unusual on several accounts. First, the TMSF takes over banks after hours on Fridays to let the markets absorb the negative news. Second, it is very unusual for the TMSF to take over a bank by employing hundreds of police officers. Third, the TMSF justifies the takeover by citing weakness in the financial strength of the bank.

However, in the case of Bank Asya, the TMSF took over the bank based on a problem in the application of a partner in 1996 when the bank was established. Overall, this unusual behavior by the TMSF deserves a deeper examination of the matter.

Why Bank Asya?

It is no secret that President Recep Tayyip Erdoğan wanted to take over Bank Asya. He openly claimed: “It is up to the Banking Regulation and Supervision Agency [BDDK] to take action against Bank Asya. Otherwise, the BDDK will be responsible for the consequences.”

Bank Asya has been under constant attack by the media controlled by supporters of Mr. Erdoğan -- despite the fact that Bank Asya is the third strongest bank in terms of capital requirement ratios in Turkey.

Forcing the bankruptcy of the bank would ultimately show the unchecked power of Mr. Erdoğan and crush any opposition against him. Furthermore, his efforts to demonize Bank Asya are part of a bigger framework of fighting the “parallel state,” which was supposedly run by Mr. Gülen against Mr. Erdoğan.

Thus, an ultimate victory over Bank Asya is the low hanging fruit for Erdoğan that would lead to his ultimate governance of Turkey combining both executive and legislative powers with the ability to shape the judiciary system. This would also allow him to take a more adventurous path in foreign policy in the hopes of gaining more popularity throughout the Muslim world.

'New Turkey' by President Erdoğan

The case of Bank Asya also generates a long paper trail that sheds light on Mr. Erdoğan's vision of a “New Turkey” and his tactics to govern, which are similar to the governing style of President Vladimir Putin. In fact, Yigit Bulut, chief adviser of President Erdoğan, claimed that there are two world leaders: President Erdoğan and President Putin, while excluding President Obama from the list!

In 2004, Russian courts accused Yukos Oil Company of tax evasion and forced the company into bankruptcy. The former shareholders of Yukos filed a claim at the Permanent Arbitration Court in 2007 by arguing that Russian courts and officials did not act in good faith. All of the three judges at the Arbitration Court unanimously agreed, awarding Yukos shareholders more than $50 billion in damages in 2014.

Similarly, President Erdoğan and his appointees have left a long trail of negative comments about Bank Asya. The initial attack on Bank Asya occurred when Efkan Ala, minister of interior in Erdoğan's Cabinet, claimed that a bank in Turkey made $2 billion dollars during the corruption investigation of 2013, suggesting that these raids were politically motivated and the profits were made unjustly.

However, the following day the media owned by supporters of Mr. Erdoğan blamed Bank Asya for the unjust profits. Bank Asya refuted the accusations by publishing its transaction records indicating that Bank Asya in fact suffered losses during the aforementioned days.

After a brief silent period, the Central Bank of Turkey and the BDDK also refuted the allegations. Subsequently, Mr. Ala corrected himself and said he was misunderstood. This did not stop Mr. Erdoğan, though. He took off his gloves and publicly condemned Bank Asya, encouraging his followers to withdraw their money from the bank.

In a coordinated effort, all public institutions withdrew their money from Bank Asya and stopped conducting business with the bank. For example, the Taraf daily reported that state-owned Turkish Airlines (THY) withdrew approximately $300 million all at once from the bank. Other state institutions, including the Settlement and Custody Bank Inc. (Takasbank) of the Borsa İstanbul (BİST), followed suit and withdrew $280 million. Meanwhile, the media controlled by supporters of Mr. Erdoğan generated news reports continuously questioning the soundness and financial credibility of the bank.

In response to the increasing pressure from the government, media and watchdogs, Bank Asya decided to sell the bank to Qatar Islamic Bank (QIB) with the permission of the BDDK. However, acquisition negotiations abruptly ended when Minister Ali Babacan announced that Ziraat Bank, a state-owned bank, was considering the acquisition of Bank Asya, which never materialized. Instead, Borsa İstanbul abruptly suspended trading of Bank Asya shares on the grounds that major shareholders of Bank Asya had changed, which was rejected by the executives of Bank Asya.

What is next?

It is very difficult for President Erdoğan and TMSF officials to argue in a court that government officials and the TMSF are acting in good faith. Furthermore, the BDDK has not taken action against these systematic attacks against Bank Asya despite explicit laws against making comments on the financial state of banks in Turkey.

Thus, the officials involved in the takeover will meet with the shareholders and depositors of shareholders in Turkish Courts. As 70 percent of Bank Asya shares are owned by foreign investors, similar to the case of Yukos, Turkey may have to pay a hefty price for these actions.

Finally, the nationalization that the Bank Asya experienced might happen to other banks, which may consequently generate a systematic risk for the whole Turkish economy. Overall, the Turkish economy is very likely to pay a hefty price for President Erdoğan's adventurous financial play.

*Vahap Uysal is an associate professor of finance at DePaul University, Chicago.

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